Personal guarantees - the most vexed of topics...

It has become pretty much a daily conversation - the opener to to almost every funding enquiry 'I/my client isn't prepared to offer a guarantee'.

First, the good news:


Personal guarantees aren't always required - in fact there are certain lenders who take the view that if a deal needs a guarantee, they probably shouldn't be doing it.

In other cases a guarantee might be inappropriate if, for example, the directors are not the key beneficiaries (often the case in VC or non-UK businesses), or have shown commitment by the way of huge personal commitment to the business.

What NOT to say:

OK, so banter about banks and lenders, what they should & shouldn't do is all great fun - you will never struggle to get people on side in the bar or even at business networks.

In reality, however it is just banter. If you are serious about borrowing then that needs to convey to the lender.

Absolute no-nos, if you want to be taken seriously include:

1. The wife won't let me. (though it will raise a smile)
2. It's too risky.
3. You have to take the risk.
4. The equipment should be your security. (more of which in a minute)

What the lender sees/hears:

Pretty much without fail, the borrower (you!) is presenting a 'no brainer' proposition. 

The strength of your confidence in the proposition is seriously undermined the minute you say you aren't prepared to offer a guarantee. 

As a broker, the nature of the response rather than the 'yes' or 'no' will tell me much of what I need to know about circumstances.

Willingness to compromise will add substantial weight - limited/ceilinged guarantees, warranties against key risk factors, time-limited guarantees (eg for the first year) - all give an indication of willingness to share risk, rather than expecting a lender to take your business risk for you.

Different products - Different risk:

At its heart, the guarantee argument largely revolves around risk sharing, however the nature of risk to a lender differs dependent on product.

The key argument is actually a circular one - particularly on asset-based deals. The equipment/invoices will secure the deal. Yes, they probably will.

However, the lender will argue that with you - the borrower - on side the ability to recover that value will be greatly enhanced.

On unsecured loans, as the name suggests, there is absolutely no inherent security to the lender so (oxymoronic as it is) they will nearly always want a guarantee to stop you simply pocketing the cash & disappearing to Barbados. (They are a cynical lot!)

How to make your case:

First and foremost, the case for not offering guarantees can only be approached from the angle that they are surplus to requirements, never from the notion that the lender should take your business risks (save that one for the pub).

In supporting the case the key 'evidence' should be historic performance showing will and ability to pay.

Other factors will be your own historic success, the underlying strength within the deal and your personal status within the business.

Be prepared to offer some flexibility & compromise to address the specific concern of lenders - a good broker will point you in the right direction.

And finally:

Too good to be true rules apply.

If you are a new or loss-making business and someone offers you a truly unsecured deal - be afraid.

In most cases they will be brokers masquerading as lenders and will need up-front fees - that is the big clue!


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ABOUT:

Mark Jones has spent 25 years in the commercial lending business

His aim is to be blunt but helpful in his advice on funding matters.

Call him on 07932 075 754

or email